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How Mortgage Payments Work
A mortgage payment looks like one number, but it is five parts added together — and the parts change every month. Here is what each one is, and how the split works over 30 years.
What a monthly mortgage payment is made of
A monthly mortgage payment is usually made of five parts. Principal is the part that pays the loan down. Interest is the lender's charge for the loan. Property taxes go to your local government. Homeowners insurance protects the home. PMI — private mortgage insurance — protects the lender when the down payment is under 20%. Some homes add a sixth part: HOA dues.
Take the example used on the mortgage calculator: a $400,000 home, $80,000 down, a $320,000 loan at a 6.5% example rate over 30 years, $4,800 a year of property taxes and $1,800 a year of insurance. The monthly payment is $2,572.62: principal and interest $2,022.62, taxes $400.00, insurance $150.00, HOA $0.00 and PMI $0.00, because 20% down means no PMI. With only 10% down the same home costs $2,975.44 a month — the loan is bigger and PMI adds $150.00.
Why the split changes every month
The total payment on a fixed-rate loan stays the same, but the split inside it changes every month. Interest is charged on the balance that is left, so it is largest at the start and shrinks as the balance falls. Principal is whatever is left of the payment after interest, so it grows as interest shrinks.
On the $320,000 loan above, the first payment is $2,022.62 of principal and interest: $1,733.33 of interest and only $289.28 of principal. By month 12 the interest is $1,715.62 and the principal is $307.00. By the last payment, month 360, the interest is $10.90 and the principal is $2,011.72. Over the whole loan you pay $408,142.36 of interest — more than the loan itself. The amortization calculator shows this month by month.
Taxes, insurance and escrow
Most lenders collect taxes and insurance with the monthly payment and hold the money in an escrow account, then pay the tax bill and the insurance premium when they fall due. That is why the payment you make is higher than principal and interest alone. Taxes and insurance can change from year to year, so the monthly payment can change too — even on a fixed-rate loan, the principal and interest part stays fixed but the tax and insurance parts move.
What PMI is, and when it ends
PMI is insurance you pay that protects the lender, not you. It applies on most conventional loans when the down payment is under 20%. At 0.5% of the loan per year, PMI on a $360,000 loan is $150.00 a month. It usually ends when the loan balance reaches 80% of the home value — month 95, about 7 years 11 months, in the example on the PMI calculator. You can also ask your lender to remove it then. Paying extra toward principal brings that date closer.
What to check before you sign
Ask for the loan estimate and read it line by line: the rate, the monthly payment, the closing costs, and whether the rate is fixed or changes. Check what part of the payment is principal and interest and what part is taxes and insurance, so a change in the tax bill does not surprise you later. And run the numbers yourself first — the mortgage calculator on this site uses the same formula a lender uses for principal and interest, so you can check their figures against your own.
Frequently asked questions
What is the biggest part of a mortgage payment?
At the start, interest. On the $320,000 example, the first payment is $1,733.33 of interest and $289.28 of principal. Taxes and insurance add $550.00 a month on top.
Why does my mortgage payment go up?
Usually because property taxes or homeowners insurance went up. The principal and interest part of a fixed-rate loan never changes; the tax and insurance parts are refigured each year.
Does PMI last the whole loan?
No. On a conventional loan it usually ends when the balance reaches 80% of the home value. On the 10% down example here, that is month 95 and the total PMI paid by then is $14,100.00.
Sources and method. Standard amortization formula: monthly rate r = annual rate / 12, n = years × 12, payment M = P × r × (1+r)n / ((1+r)n − 1). PMI usually ends when the loan balance reaches 80% of the home value (Consumer Financial Protection Bureau guidance). Affordability uses the 28/36 rule of thumb used by many lenders. Rates in examples are examples only, not live market rates. Results are estimates, not financial advice.
Estimate, not financial advice. This calculator uses the standard amortization formula and the numbers you type in. It is not a loan offer and not financial advice. A lender will check your credit, income and debts and quote its own rate and fees before you borrow.